The Impact of Weak Credit Covenants on Financial Stability and Economic Growth in Kenya

Description

Page: 19-28

Jackson Barngetuny (School of Business, University of Eastern Africa, Baraton, Kenya)

This study examines the impact of weak credit covenants on financial stability and economic growth in Kenya, employing textual analysis as the primary research method. The findings suggest that weak credit covenants, characterized by poorly structured terms and inadequate enforcement mechanisms, pose significant risks to the country’s financial system. Through an analysis of loan agreements, financial disclosures, and regulatory documents, it was revealed that many covenants-whether affirmative, negative, or financial-suffer from a lack of clarity, enforceability, and effective monitoring provisions. The insufficient regulatory framework, further exacerbated by weak enforcement by the Central Bank of Kenya (CBK) and the Capital Markets Authority (CMA), amplifies these risks, contributing to higher default rates and systemic vulnerabilities within the banking sector. The study also underscores the negative economic repercussions of these weak credit covenants. Limited access to credit in high-risk sectors such as Small and Medium-sized Enterprises (SMEs), agriculture, and manufacturing stifles economic growth and investment in vital areas. Furthermore, the absence of robust credit agreements has undermined investor confidence, discouraging potential investments and hindering overall economic progress. This research emphasizes the urgent need for stronger regulatory oversight and more comprehensive covenant structures to mitigate these risks, thereby fostering a stable financial environment conducive to sustainable economic growth. Addressing these deficiencies is crucial for enhancing financial stability and supporting Kenya’s long-term economic development.